The two kinds of 457(b)
| Governmental 457(b) | Tax-exempt employer 457(b) | |
|---|---|---|
| Who offers it | State and local governments | Nonprofits and other tax-exempt employers |
| Rollover to a 401(k), 403(b), governmental 457(b) or IRA | Yes | No |
| If you try anyway | Not applicable | Treated as an excess contribution, subject to an excise tax |
Source: IRS comparison of 457(b) plans and the IRS issue snapshot. The IRS says the same for 457(f) plans.
How to tell which one you have
Ask your plan administrator or HR department in writing: “Is this a governmental 457(b) plan?” The summary plan description usually states the employer type. Do not guess, because the cost of guessing wrong is a tax problem, not just a delay.
The traps with a governmental 457(b)
- You can lose the early-withdrawal advantage. The IRS says distributions from a governmental 457(b) are generally not subject to the 10% additional tax on early distributions, except for amounts that were rolled into the plan from other plans or IRAs (IRS Topic 558). Money rolled into an IRA is IRA money, and IRA withdrawals before age 59½ are subject to the 10% additional tax unless an exception applies.
- Withholding. A taxable eligible rollover distribution paid to you from an employer plan is subject to mandatory withholding, generally 20% (IRS Topic 413). Use a direct rollover.
- Hardship payments. Payments for an unforeseeable emergency are hardship distributions, which cannot be rolled over (IRS: Rollovers of retirement plan and IRA distributions).
- Required minimum distributions. These cannot be rolled over either.
Where an annuity fits
An annuity is bought inside an IRA after the rollover. The IRA already defers tax, so the case for an annuity rests on its contract features, not on extra tax deferral. A younger retiree who may need to withdraw before 59½ should weigh two costs together: the loss of the 457(b) exception and any surrender charge on the annuity. Ask your tax professional to run the numbers before you decide. See every rollover account at a glance.
Not sure which kind of 457(b) you have?
Request a no-obligation Retirement Income Review. We explain your options in plain English, with no pressure and no promises of returns.
Request my Retirement Income ReviewQuestions to ask
- Is my plan governmental or tax-exempt?
- If governmental, can the plan send a direct rollover to an IRA?
- How much of my balance came from other plans or IRAs, since that part is treated differently?
- Do I expect to need money before 59½, and what would it cost from an IRA annuity?
Related reading
Compare with a 403(b), and read the age 55 rule and how annuities are taxed.
Where to check these rules
Every rule on this page comes from the IRS. Read the source for your situation:
- IRS: Comparison of tax-exempt 457(b) plans and governmental 457(b) plans
- IRS: Issue snapshot, 457(b) plan of a tax-exempt entity
- IRS Topic 558: Additional tax on early distributions from retirement plans other than IRAs
- IRS Topic 413: Rollovers from retirement plans
- IRS: Rollovers of retirement plan and IRA distributions
Availability and rules vary by state
Life insurance and annuity products, rates, riders and consumer protections differ by state, and a given product may not be available in every state. Honorbrook is licensed in the 11 states below; which products we can offer you depends on what carriers sell in your state. Each state’s insurance regulator can verify an agent’s license and answer consumer questions.
- Virginia: Virginia Bureau of Insurance
- Maryland: Maryland Insurance Administration
- North Carolina: North Carolina Department of Insurance
- South Carolina: South Carolina Department of Insurance
- Georgia: Georgia Office of Insurance and Safety Fire Commissioner
- Alabama: Alabama Department of Insurance
- Louisiana: Louisiana Department of Insurance
- Texas: Texas Department of Insurance
- Michigan: Michigan Department of Insurance and Financial Services
- Indiana: Indiana Department of Insurance
- West Virginia: West Virginia Offices of the Insurance Commissioner
This article is general information and is not tax, legal, investment or financial advice. Annuity guarantees depend on the issuing company’s claims-paying ability, and surrender charges and fees may apply. A licensed agent can help with your situation.